How the Biden Administration’s Policies Could Advance ESG and Impact Investing

Joe Biden has been a supporter of Impact and ESG investing having championed these initiatives in the Obama Whitehouse. What emerged as a nascent trend in the 2008-2010 downturn has blossomed over the ensuing years and is sure to be catapulted to new heights by the Biden Administration that comes to office amidst growing awareness that people want a more inclusive economy with more equitable access to opportunities. 

This article covers changes we expect for corporate America under Biden in the areas of Investment Management, corporate accountability for Impact and ESG Reporting, banking’s commitment to Community Reinvestment Act investments to serve the underserved, Sustainability and Clean Energy compliance through re-regulation and reinstating the Paris Climate Accord, and possibly policies that encourage corporations to adopt Stakeholder Capitalism to broadening their responsibilities beyond just the stockholders.

Change is the only constant.  Before the coronavirus pandemic, the Trump Administration oversaw a booming economy marked by low unemployment and a stock market that reached record highs. However, their approach to environmental, social and governance issues (ESG) was starkly different to his predecessor Barack Obama as evidenced by withdrawing from the Paris Climate Accords, a regulatory approach that rolled back over 125 environmental safeguards and pushed forward proposals that make it more difficult for fiduciaries of retirement plans to direct money into ESG-focused funds.

Joe Biden’s winning of a highly contested election will mark a change in how ESG is approached by the incoming Administration. We believe it will affect the field in the following areas:

Investment Management

Source: Money Control

Sustainable investing has been growing despite political headwinds from Washington.  What will it do when the wind changes and it gets policy support from the Whitehouse?  According to Morningstar, sustainable-fund assets globally reached $1.2 trillion in the third quarter of 2020. Domestically, assets in sustainable mutual funds and ETFs increased to $179 billion at the end of the third quarter, up 12.5% from $159 billion at the end of the second quarter. In addition, there were 53 new sustainable funds opened in the US in 2020, bringing the total number to 367.

According to Morningstar, the COVID-19 crisis highlighted the importance of building sustainable and resilient business models based on multi-stakeholder considerations. Furthermore, the outperformance of sustainable funds in the first quarter of 2020 globally helped alleviate investor concerns about a potential return trade-off in sustainable strategies. 

These gains in ESG and impact investing occurred despite plans by the U.S. Department of Labor to make it more difficult to direct money into funds of this nature. According to Trillium Asset Management’s CEO, Matt Patsky, president-elect Joe Biden’s Administration is likely to reverse the restrictions placed on ESG fund investing which will produce “a much more dramatic positive trend” in terms of monetary inflows to the space. “ESG continues to gain market share of total investable dollars…the performance is there, the risk mitigation is there, and the analysis is there.”

Impact and ESG Reporting

Source: newamerica.org

In 2009, the Obama Administration opened the Office of Social Innovation and Civic Participation with the aim of supporting and strengthening the social sector. The office elevated impact investing within the federal government by domestically hosting meetings on social innovation at the White House Forum on the Impact Economy and globally through the G8’s Social Impact Investing Forum. Furthermore, the office coordinated federal policy for impact programs run by federal agencies such as the Global Development Innovation Venture Partnership by the U.S. Agency for International Development (USAID), Accelerating Market Partnerships Programs by the U.S. State Department, Freshworks Fund by the U.S. Treasury and Department of Agriculture and the SBIC Fund by the Small Business Administration (SBA).

The office was closed by the Trump Administration but Adam Bendell, CEO of Toniic, anticipates that a similar initiative will be restarted by the Biden-Harris Administration. He feels that it was effective in providing leadership and inspiration to the impact community. 

One of the areas Bendell identifies as needing leadership is around the topic of what qualifies as ESG or impact. He is of the opinion that greater clarity around definitions, standards and required disclosures could make the market more efficient and reduce skepticism pertaining to the reliability of ESG metrics.

The Trump Administration discouraged ESG investing in retirement plans and walked back efforts to produce standardized measurements in the space, despite much objection. The US Securities and Exchange Commission (SEC) is seen as an area of opportunity for the Biden Administration to standardize ESG metrics and disclosures in collaboration with the Sustainability Accounting Standards Board (SASB). The SASB has advocated for SEC required financial accounting disclosures to include social and environmental disclosures as well. Their approach is seen as fairly mainstream as it focuses on whether ESG practices are financially material and less concerned about if a company’s ESG practices are having their intended impact or not.

Community Reinvestment Act

Source: Pexels / Erik Mclean

The Community Reinvestment Act of 1977 (CRA) was designed to reverse the effects of a form of financial discrimination called redlining (a practice where banks avoid lending to customers and businesses in lower income neighborhoods where they have branches while freely accepting their deposits) and to encourage greater investment in minority communities and lower income neighborhoods. The CRA ensures that banks provide credit, mortgages, and small business lending to all members of society, not just the wealthiest. 

Currently, most banks meet their CRA requirements by funding Community Development Financial Institutions (CDFIs), which in turn provide loans to lower income households and businesses.

The Trump Administration has finalized a new rule through the Office of the Comptroller of Currency (OCC) that weakens the CRA by de-emphasizing investments in low- and moderate-income communities. Critics argue that this new rule damages the essence of the Act by disproportionately benefiting banks at the expense of underserved communities.

The U.S. Impact Investing Alliance (USIIA) expects the Biden presidency to strengthen the CRA and support CDFIs as they enjoy bipartisan support as a method of driving capital to lower income communities, especially at a time when they have been devastated by the COVID-19. In addition, the aforementioned rule was finalized without the support of the Federal Reserve or the Federal Deposit Insurance Corporation (FDIC), which are the principal agencies involved in carrying out the CRA.

The USIIA is urging the President-elect Biden to work with Congress to aid businesses affected by the Coronavirus crisis by building on the success of CDFIs and minority depository institutions (MDIs) that have supported small businesses owned by black and brown entrepreneurs and those in rural and tribal communities through the crisis.

Sustainability and Clean Energy

Source: Wikipedia.org

Over four years in office, the Trump Administration has rolled back over 125 environmental safeguards governing clean air, water, wildlife, and toxic chemicals through the Environmental Protection Agency (EPA) including formally withdrawing from the Paris Climate Accords. They argue that the existing regulations had a burdensome effect on industries like coal, oil and gas.  

The Biden Administration is expected to reinstate the Obama-era limits on planet-warming carbon emissions from power plants, cars and trucks.

Other areas include:

• Protections for more than half of the nation’s wetlands; 

• Giving wildlife precedence over leasing land for oil and gas extraction with the core mission of conserving natural resources; 

• Significantly decreasing greenhouse gas emissions over the next decade.

The Biden Administration has already created a cabinet-level seat solely focused on climate change for the first time in U.S. history. John Kerry has been appointed as special envoy for climate change and was involved in the formation of the Paris Climate Accords, signing on behalf of the U.S. in 2016. Joe Biden has pledged to rejoin the treaty as one of his first acts in office. He sees climate change as an “urgent national security threat.”

Furthermore, under Biden, green energy businesses are expected to thrive due to a change in international trade policy around tariffs. Moodys’ chief economist, Mark Zandi, predicts that Biden will use executive orders to dramatically lower tariffs placed on the country’s top international trading partners by the Trump Administration.

Higher tariffs have put a strain on green energy companies as a large quantity of the parts for solar and wind power are sourced abroad. Kristin Hull, CEO at Nia Impact Capital, expects corporate cash flows will come from revenues instead of federal government subsidies or tax cuts.

“That’s where we will see which businesses are the sustainable business models, and those are the ones that are going to prevail,” Hull says. She believes that the green energy industry will flourish from returning to policies that support the free flow of commerce and international trade.

Stakeholder Capitalism

Source: Business Roundtable

In 2019, 180 of the nation’s top business leaders got together through a meeting organized by the Business Roundtable and declared that the purpose of a corporation is to serve all stakeholders. This was a significant shift away from the widely adopted ideology from the 1970s of shareholder primacy, which states that a company exists only to maximize profits for its shareholders.

With their statement, the Business Roundtable joins other existing movements such as Conscious Capitalism and the Shared Value Initiative which emphasize prioritizing customers, workers, the environment and communities in addition to shareholders.

Martin Whittaker, CEO of JUST Capital, an independent, nonpartisan research firm established by billionaire Paul Tudor Jones, believes that Biden could advance ESG investing and build working relationships with company leaders to usher in changes that benefit the American worker.  

Whittaker’s sense is that “a Biden Administration is amenable to that idea (stakeholder capitalism) and in fact, would look to that as a way to get corporate America working for more Americans straight away: solving issues, tackling racial inequality, tackling climate change, building good jobs, lifting wages, those are things that people want.”

Whittaker adds that Biden is beginning his Administration at a time when the private sector is motivated to address social problems that are traditionally thought of as public sector issues. Namely racial inequity, climate risk, and poverty in America. The death of George Floyd in the summer of 2020 and inequality exposed by the coronavirus, drove more corporate leaders to invest in their workers and set new goals for representation of people from marginalized backgrounds. 

“From a policy perspective, the Biden Administration is going to face a divided Congress, at this point, so they are going to have to look for ways to support ESG overall as just a smart investing move and begin to promote actions that make it easier.”

References

1. How a Biden Administration will Boost ESG and Impact Investing, Barron’s (Abby Schultz)

2. Trump Administration Moves at ‘Warp Speed’ to hurt ESG investing, Boston Globe (Tim Quinson)

3. Trump Rolled back more than 125 Environmental Safeguards. Here’s how, The Washington Post (Juliet Eilperin, Brady Dennis & John Muyskens)

4. What a Joe Biden Presidency means for Capitalism, ESG Investing, and the American Worker, According to a Leading Expert on the Economy, Business Insider (Marguerite Ward)

5. Trump Plan to Block Green 401(k)s Stirs Fund Industry Fury, Bloomberg (Tim Quinson)

6. Sustainable-Fund Assets hit $1.2 Trillion as ‘ESG Continues to Gain Market Share, Barron’s (Leslie P. Norton)

7. Who Joe Biden has Announced for his Cabinet so far, People (Virginia Chamlee)

8. Joe Biden will cut Tariffs, Change Immigration Policy and Rebuild Infrastructure, Moodys’ Mark Zandi predicts, The Philadelphia Inquirer, Mark Zandi

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